The Benign-Rate Scenario

摘要

I'm not wavering from my earlier (FEB. 16) forecast that U.S. stocks would be up 20% in 2004, even though the market has delivered a return of only 2% in the first four months. My reasoning had to do with the fact that most experts were predicting anything but returns near that 20%―and that markets always veer off from the consensus forecast. Now here's another reason for a bullish view: Interest rates should also be more benign than what's expected in the consensus view. A bull market for bonds (low rates, that is) tends to go hand in hand with a bull market for stocks, and for good reason. A stock is a claim to a stream of future earnings. Discounted to present dollars, that stream is worth more when interest rates, and thus the discounting factor, are lower. To put it another way: The earnings return on risky equity has to compete with the coupon return on safer bonds. If bond rates are low, the earnings yield on stocks can be low, too, and that means the inverse, the price/earnings ratio, can be high.